Is Baan Clinically Dead?

On January
4, 2000 Baan, Europe's No. 2 business software company, sank deeper into trouble
as its CEO resigned and it forecast a fourth quarter loss of $240 million to
$250 million after restructuring. Its shares plunged over 30 percent as analysts
cut recommendations on the loss-making vendor, which has yet to name a replacement
for Mary Coleman, who is returning to her Silicon Valley home after taking charge
only last May. Baan had reported a fifth consecutive quarterly loss in the third
quarter, but in November had given a more upbeat earnings outlook. Some analysts
had seen it bouncing back from a software-spending freeze in last year's millennium
bug preparations.

Baan said a restructuring would cost $200 million in the fourth quarter. It
will close 14 offices and cut staff by 4 percent, or about 188 people. It said
the reorganization would enable it to focus its operations on "open integration"
-- a buzzword for harnessing the Internet's power to let customers link up with
their business partners beyond in-house computer systems. However, analysts
said the latest news would make it harder for Baan to attract new customers,
and the suggestion of low morale behind Coleman's departure could bring into
question its grip on its existing customer base. While in the past Baan made
a name through its ERP systems, which let companies integrate in-house administration
like salaries and staffing, now U.S. rivals like Siebel and Ariba have shown
how the Internet opens doors to broader networking.

Pierre
Everaert, the current chairman of Baan's supervisory board, will be interim
CEO while the search for a permanent CEO is underway. Baan said the reorganization
would cut its cost structure by approximately $25 million per quarter, enabling
it to continue investing in e-commerce research and development. The bulk of
the restructuring charge would be taken as non-cash charges in the fourth quarter.

"To
me, it looks like a hidden profit warning," said Louis Hakkenberg of Nationale
Investeringsbank. "This new strategy is being used to mask the bad profit news."
A fourth quarter revenue forecast of $140 million to $150 million from Baan
also failed to impress, looking flat after its third quarter revenue of $143
million slid from $195 million in the third quarter of 1998. Baan's third quarter
loss at $24.7 million was already below market forecasts, but its chief financial
officer Jim Mooney said in November that the company planned to get back in
the black in 2000, even allowing for a shift in its product pricing. "I'm really
surprised by Coleman's departure because [investors and customers] had perceived
Coleman as very positive for the shareholders," said Jeroen van Harten, an analyst
at Rabo Securities. Some analysts saw Baan as a possible takeover target if
its stock were to weaken to around its 12-month low of just over 6 Euros ($6.19)
dating from last March.

Market
Impact

This dj vu situation comes at a most unfortunate moment for the company. Baan
seemed to be on the verge of reversing its fate after more than a year of red
ink and internal turmoil. These renewed hardships seem even bleaker against
the backdrop of its main competitors' (SAP and PeopleSoft) recent bullish Q4
earning predictions.

Mary
Coleman was undisputedly the spirit and torchbearer of the turnaround of the
company, and her departure is a serious blow to the company's already shaky
situation. Furthermore, we believe that Baan's vagrant strategy manifested in
a detour from its core ERP business, which was its core competency, in favor
of e-commerce, where it is a relative newcomer, is particularly disconcerting.
Stopping development of both its core ERP product and extensions that Baan had
developed for vertical manufacturing industries such as automotive and industrial
products, and canceling some development projects that were being done for individual
customers, may further alienate the company from its current customer base.
Without it, all envisioned development of e-commerce products will be nothing
but another shot in the dark.

We
do not believe there is a great likelihood of the company's takeover while its
market capitalization is still around $2 Billion, but its cash situation is
deteriorating steadily. We would recommend Baan consider spinning off some of
the companies it bought, such as Customer Relationship Management (CRM) firm
Aurum and financial software maker CODA Financials. In fact, Aurum could have
a market capitalization higher than its parent could, and if spun off, it could
compete head on with the only remaining independent CRM vendor, Siebel Systems.
The potential equity earned from these sellouts would come in handy for Baan,
as a much needed cash infusion for focusing on its combined e-commerce, supply-chain
and ERP back-office product portfolio.

User
Recommendations

We have no intentions of advising current Baan users, particularly those in
a middle of implementations, to remain calm. However, we believe that their
endeavors will not be seriously jeopardized. They may want to consider beefing
up their internal resources from the expected spate of laid off, very experienced
Baan consultants. Users currently evaluating Baan products are advised to exercise
extreme caution in making any critical decision about future partnership with
the company, due to its dire present situation and very uncertain future.